The state of Bahrain’s economy

Economic Policy
Diversifying the economy away from oil revenues, which accounted for $26.1 billion of the government’s $29.9 billion of revenue in 2012, should be a major economic priority for Bahrain, writes Your Middle East’s Public Finance analyst Bassam Aoun.

The situation in Bahrain is a matter of perspective. Socially, the Kingdom has been in the midst of a historical shift in its political dynamic. Sporadic protests against Prime Minister Sheikh Khalifa bin Salman al-Khalifa’s rule, which has been uncontested for 41 years, have thrust this small but divided nation into a state of political flux. Reforms have been discussed, talks have been held, and promises have been made. Underneath the surface, however, these efforts have been criticized as unsubstantial – talks have lacked any significant presence of the ruling family and opposition members remain steadfast in their decision not to concede any of their demands, mostly in fear of appearing anything less than determined to contest monarchy loyalists.

Prince Salman bin Hamad bin Isa al-Khalifa, the crown prince and heir apparent of the Bahraini monarchy, has attempted to diffuse tensions by taking on a proactively reformist role in the exchanges between opposition members and loyalists, all while struggling to maintain several sectors of the economy. Both sides, nevertheless, remain intransigent in their approach to compromise. Evidently, the sociopolitical perspective is still a work in progress.

Protests are ongoing and regularly test the nation’s economic standing by pushing it further to the brink.

At the moment, the political outlook seems dismal, but the economic outlook for the Kingdom, however, is a mixed review. Some sectors have surely been battered by the current situation; tourism, for example, is under pressure due to the demonstrations, which have at times ended in violence. International events, such as the Formula One Grand Prix, have come under scrutiny and have been labeled by opposition supporters as an excuse for the monarchy to fake its legitimacy. The tourism industry is of the essence to the Kingdom’s economic vision, and will require additional attention in the near term.

Public debt is another issue that is going to be on policymakers’ agendas soon. The figure is currently at 35.7% of GDP, according to recent International Monetary Fund consultations with the Kingdom, and is headed for 61% by 2018. The budget deficit, conversely, was better than initially expected; due to higher than expected oil prices, more efficient capital spending, and a reduction of gas subsidies for the industrial sector, the government was able to tighten its belt and limit its deficit to 2.6% of GDP.

Be it a positive development on multiple levels, it was nevertheless considered superficial in the eyes of several analysts. Bahrain’s dependence on its oil market is a crucial deficiency in its current economic plan. Were it not for a relatively high oil price in 2012, its fiscal situation would not have fared as well as it did. The breakeven oil price, i.e. the price per barrel required to balance a national budget, was clocked at a worrying $115 – compared to $94 for Saudi Arabia and under $50 for Qatar. Diversifying the economy away from oil revenues, which accounted for $26.1 billion of the government’s $29.9 billion of revenue in 2012, should be a major economic priority.

Several avenues are available for achieving this goal; capacity building initiatives for the national labor force, the provision of a financially amicable environment for businesses, an increase in foreign direct investment inflows, and the general development of the non-oil sectors, such as the battered tourism industry. By expanding non-oil revenue streams and loosening the commodity’s grip on the economy, Bahraini officials can make significant strides towards diffusing debt pressures, particularly public borrowing costs.

Regardless of the multifaceted hardships the Kingdom is currently facing, one shining light in the domestic economy remains bright. Banks in Bahrain, despite the political instability and somewhat shaky economic outlook, have been healthy.

Bank Alkhair recently announced the success of the first tranche for its sukuk program. The Islamic bond, valued at $750 million, is funding a real estate development portfolio for a Saudi Arabian firm, and offers an exceptional coupon rate of 5.75%. As a wholesale bank, Bank Alkhair is performing better than its retail counterparts; recent national stress tests have revealed a solid degree of resiliency against external shocks for wholesale banks, which is further amplified by the fact that their assets amount to a level equivalent to 480% of GDP. Retail banks, however, are still vulnerable to instability, particularly bouts of political unrest that could shake domestic and foreign confidence in the sector.

Protests are ongoing, even to this day, and regularly test the nation’s economic standing by pushing it further to the brink. Oil prices have remained relatively high over the past few years, thereby buoying Bahraini finances. However, given the political transitionary period it is now undergoing, a slowdown in the petrochemical industry coupled with additional financial duress in the banking sector could prove overwhelming for the Kingdom. Once the Bahraini authorities make significant strides towards diversifying away from oil dependence, which they have already begun to do, the long term outlook will concurrently improve.

Bassam Aoun is a Business Editor at Your Middle East. He is currently based in Abu Dhabi and holds a BA in Economics from the American University of Beirut and an MPP (Master of Public Policy) from the University of Chicago. He has written for the Chicago Policy Review and is interested in economic and fiscal policy in the Middle East.